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UBAM1013 FIM (October 2014) Lecture 3 – Accounting for Materials Page 1 of 7
Universiti Tunku Abdul Rahman UBAM1013 Financial Information for Management (October 2014) Lecture 3 – Accounting for Materials Inventory control 1. Classification of inventories: Raw materials Work-in-progress Spare parts/consumables Finished goods 2. Why inventory control is important: Holding costs of inventory may be expensive. Production will be disrupted if we run out of raw materials.
Inventory control system 1. Inventory control system consists of: Ordering Purchasing Receiving Storage Issuing 2. The ordering, purchasing and receiving of raw materials: Purchase requisition from Stores department Quotations requested by Purchasing department Purchase order sent by Purchasing department to Suppliers Delivery note stating quantities of materials delivered Goods received note Invoice on goods purchased 3. The storage of raw materials: Recording inventory levels Stock take 4. The issuing of raw materials: Materials requisition note Materials transfers and returns Computerized inventory control systems
UBAM1013 FIM (October 2014) Lecture 3 – Accounting for Materials Page 2 of 7
Inventory Costs 1. Reasons for holding inventories: To ensure sufficient stocks are available to meet expected demand. To meet any future shortages. To take advantage of bulk purchasing discounts. To allow buffer between processes. To allow production processes to flow smoothly & efficiently. 2. Types of inventory costs: Holding costs Ordering costs Stockout costs 3. Holding costs: Costs of storage and stores operations Interest charges Insurance costs Risk of obsolescence Deterioration
4. Ordering costs: Admin costs Transport costs Production run costs 5. Stockout costs: Loss of customer goodwill Lost of contribution from lost sales Cost of production stoppage Labour frustration over stoppages Extra costs of urgent, small qty, replenishment order 6. The advantages of holding stock: Able to meet...